Obtaining financial sign-off for flex in tough economic conditions

Obtaining financial sign-off for flex can be tricky, but there are a number of factors that can build a persuasive business case, says Sam Barrett.

Obtaining the financial sign-off necessary for making significant changes to employee benefits packages can be tricky at the best of times, but with the continuing economic slowdown, this task is becoming increasingly difficult for benefits professionals. And, when those changes involve an initial investment, as is the case with the move to a flexible benefits scheme, it can be trickier still.

Simon Bailey, head of marketing for employee benefits at Aegon Scottish Equitable, says: “There are considerable upfront costs if [employers] are looking to move to a flex scheme. I’ve seen companies spend between £10,000 and £250,000 just researching staff to find out exactly what they would like in their flex scheme. But it is worth doing this as you will increase the success.”

Implementing flexible benefits platforms, designing new websites and communicating with employees all adds up. Andrew Woolnough, flexible benefits distribution manager at the Jelf Group, says: “To get a reasonable system up and running, [employers] are looking at costs of £40,000 or more. The software set-up can cost between £20,000 and £30,000 and then [they] might also have to pay a licence fee based on the number of employees covered. Additionally, [they] will need to look at the cost of marketing the new concept to [staff].”

But while a flex scheme might require a significant initial investment to ensure it is well received, in the long term, employers should be able to recoup this money. Glenn Laming, group protection sales director at Legal & General, says: “Over time, introducing flex should be a cost-positive exercise and [therefore] the current financial conditions may even encourage more employers to move to flex.”

When putting together a business case for funding there are a number of factors employers should consider. Flex, for example, gives employers greater control over the ongoing cost of benefits. Employers are able to escape annual percentage increases that providers of individual benefits slap on premiums as their benefits spend is restricted to a percentage of payroll. So, for example, while private medical insurance premiums can escalate by as much as 10% a year, the average earnings index is only 3.4%, according to the Office for National Statistics.

Providing perks through a flexible benefits scheme means that employers will be able to take advantage of price consistency, although the element of choice offered to staff through flex may mean that organisations will not necessarily be able to negotiate as good a deal on benefits as if they were being provided to all staff, says Laming. “Employers offering flex don’t want the hassle of reprinting brochures and updating websites whenever a benefit is repriced, so insurers are focusing more on consistency of price,” he explains.

The inevitable additional analysis of benefits required to implement flex can also help employers identify ways to save on costs and, therefore, build up the business case for financial sign-off. Before they even begin to think about implementing flex, employers can potentially save money simply by reviewing the benefits they already have in place. “We often come across employers who have benefits in place with providers that are no longer active in the market. These plans are out of date and will also be uncompetitive on price,” Woolnough explains.

He adds that one organisation he worked with saved £18,000 by moving its 1,200 employees over to a new group income protection provider.

These savings can be magnified by carefully rebrokering benefits options too. For example, Woolnough says that where the same insurer can provide a number of products there is often room for negotiation on price. “Because they have a better picture of the risk, they’ll be prepared to look more favourably at it on the pricing,” he explains.

Organisations that use external benefits consultants may also be able to take advantage of their bulk-buying power to secure better deals. Because of the number of clients they work with, larger consultancies can secure better terms on products such as dental and travel insurance. In a large flex scheme this can translate into savings of thousands of pounds. These savings can then be used to fund the set-up or on-going running costs of a flex scheme.

Offering tax-efficient perks through a salary sacrifice arrangement can also generate significant savings, further strengthening the business case for flex. This works well on options such as childcare vouchers, cycle-to-work schemes and even bonuses, although the big winner is really pension contributions. Andrew Kilbey, managing director of consultancy Enrich (formerly Gissings Advisory Services), explains: “If [employers] give employees the opportunity to make additional pension contributions through salary sacrifice, this will save the employee and the employer paying national insurance contributions on them. If [they] redirect a lot of pension contributions this way, [the] 11% saving on national insurance can be sizeable.”

The argument for flex can be given a boost due to a change in circumstances for the organisation. This is particularly true if an organisation has just gone through a merger or acquisition where employers can be left with a mish-mash of benefits packages to deal with. “Introducing flex is a great way of equalising benefits packages. Every employee gets to see the same suite of benefits although their entitlements might be different in line with the Transfer of Undertakings (Protection of Employment) (Tupe) regulations,” says Kilbey.

Making provision for staff to retain their existing benefits, albeit through flex, can also result in considerable savings for an employer. Kilbey says that as well as saving on consultancy fees, an employer will also save money as they won’t need to buy out employees who don’t want to lose their current benefits package. Further savings will also be achieved through reduced administration costs.

Some savings, however, are less easy to quantify, so employers should ensure they are not overlooked when convincing a finance director of the merits of flex, says Laming. “Flex can make an employee benefits package much more visible, which will lead to improvements in staff engagement. [In addition], you can look at absence and staff turnover figures, [but] this can be difficult to measure. How can you tell whether an employee decided to stay with the company because of your flex scheme?” he adds.

But the promise of future savings, especially when they relate to intangibles such as enhanced staff engagement, isn’t always a persuasive enough argument. Finding a cost-effective way to introduce flex may add weight to the case for the perk. “Costs are coming down. Advances in technology mean it is a lot easier to put a scheme in place and there are plenty of options from basic online packages that are aimed at smaller companies right through to bespoke packages for the corporate market,” says Bailey.

On the whole, benefits providers are also much more comfortable with flex and the technology surrounding it. Systems can be integrated easily, saving time and money.

Technology providers also appreciate that funding a one-off payment to introduce a new employee benefits package isn’t always considered good business sense.

Some providers have begun to address this concern, enabling employers to pay for their scheme in instalments over an extended period of time. The Jelf Group, for example, offers flexible payment plans for its myreward flexible benefits product. Woolnough says: “We allow employers to pay for this over a three-year period, either monthly or quarterly. This makes it much easier to implement flex.”

As well as the cost of the platform, other implementation costs can also inflate the budget, which employers should try and keep under control. Kilbey says there can be a risk of overspending on communications, for example. “Communicating to employees is the most important part of introducing a flexible benefits package, especially where you have several new things such as the benefits, the means of choosing them and the website. However, with all sorts of different communication techniques available, it is easy to overspend on this,” he says.

He recommends carrying out research among employees to find out which forms of communication they prefer. “If employees tell you they are happy with face-to-face meetings and a handbook, don’t waste money on trendy online promotions or expensive brochures,” he adds.

Employers should also avoid being too flashy with the number of benefits that they initially put into a flexible benefits scheme. Bailey recommends putting a programme in place to roll out additional benefits year after year.

“Don’t give employees too much choice when you launch. Start with the key, well-understood benefits and spice the selection up with new ideas each year. This will [also] keep it fresh and help to improve the return on investment,” he concludes.

Building blocks towards a flexible benefits plan

While it is possible to get a flexible benefits package up and running in as little as three months, arguments over set-up costs can be more easily won by taking a gradual approach to the transition.

Total reward statements are a good stepping stone, especially if employers want to demonstrate improvements in employee engagement. Andrew Woolnough, flexible benefits distribution manager at the Jelf Group, says: “A company with 1,000 employees could buy in a total reward statement package for as little as £6,000. If [employers] monitor how this affects key parameters such as the cost of absence and employee retention, then they can build a compelling financial argument.”

Voluntary benefits plans are another useful and low-cost way to test how well a flex scheme would be received and help prepare employees for the level of choice they will be offered. Although some employer input is required, providers will often offer support in promoting these types of benefits.

Taking more time to put together an argument for flex also means employers can carry out in-depth employee research. Simon Bailey, head of marketing for employee benefits at Aegon Scottish Equitable, says: “You could run employee forums to get an idea of the level of take-up a flex scheme would get. This can create a good business case as well as giving insight into what employees really want.”